Venture Capital Trusts
Venture Capital Trusts (VCTs) are listed companies that are run by a fund manager and which, in turn, invest mainly in smaller companies that are not quoted on stock exchanges.
- When might a Venture Capital Trust be for you?
- What are they?
- How VCTs work
- How to buy
- If things go wrong
When might a Venture Capital Trust be for you?
A Venture Capital Trust might be for you if:
- You would like to get tax relief by investing in these higher risk funds.
- You understand that you might get back less than you invested and you’re comfortable with that risk.
- You’re interested in potentially earning higher returns by investing in higher risk funds that invest in smaller companies not listed on the Stock Exchange.
What are they?
If you don’t understand a financial product, get independent financial advice before you buy.
A Venture Capital Trust is a company whose shares trade on the London stock market.
A VCT aims to make money by investing in other companies.
These are typically very small companies which are looking for further investment to help develop their business.
There are very strict rules on how Venture Capital Trusts can invest your pooled money in order to qualify as VCTs.
For more information read the HM Revenue & Customs guidelines on Venture Capital Trusts.
How VCTs work
Investments in Venture Capital Trusts carry tax relief to encourage you to invest in these smaller, higher risk companies.
By pooling your investments with those of other customers, VCTs allow you to spread the risk over a number of small companies.
- You can invest by subscribing to new shares when a trust is launched or by buying shares from other investors when the trust has been established.
- You will get Income Tax relief when you buy newly issued VCTs, currently at the rate of 30% on investments of up to £200,000 per tax year. This relief is provided as a tax credit to set against your total income tax liability and, therefore, cannot exceed your total tax liability for the tax year. You won’t get this tax relief if you buy existing Venture Capital Trust shares.
- You have to hold shares in a VCT for at least five years to keep the income tax relief – if you have to sell them before then, you’ll lose this benefit.
- You won’t pay any Capital Gains Tax on profits from selling your VCT shares, no matter how short a period you have held them provided the company maintains its VCT status.
There are very strict rules on how Venture Capital Trusts can invest your pooled money in order to qualify as VCTs – for more information read the HM Revenue & Customs guidelines on Venture Capital Trusts.
Risk and return
- The value of your investments can go down as well as up and you might get back less than you invested.
- Small, unlisted companies offer you the chance at making higher but they also carry a high risk.
Access to your money
- Theoretically, you can sell your shares in Venture Capital Trusts at any point – but in practice you lock your investment in for at least five years if you invest in newly-issued shares. Any tax credit you receive will be claimed back by HMRC if you sell them before then.
- When you do sell, it can be difficult to find a buyer for shares in VCTs – there aren’t as many buyers and sellers for these shares as there are for other types of company shares.
- Charges for VCTs are often higher – and harder to understand – than for other investments.
- You might also be charged performance fees depending on how well the VCT does.
Safe and secure?
There’s no guarantee that your investment will keep its original value.
The value of your shares will go up – or down – as the investments in the VCT change their value.
If a fund manager goes bust and owes you money – and is covered by the Financial Services Compensation Scheme – then you can claim compensation of up to £50,000 per person, per institution.
How to buy
You can buy a Venture Capital Trust:
- By subscribing for new shares when a trust is launched.
- from a stockbroker or online share dealing account, just like any other company shares, for shares in an established Venture Capital Trust.
If you’re not sure if a Venture Capital Trust fits your needs, it’s a good idea to talk to an independent financial adviser (IFA).
The tax relief on Venture Capital Trusts comes in a number of different forms and with varying risks.
- The Income Tax relief is 30% on a maximum investment of £200,000 per tax year when you buy newly-issued shares. This is claimed back if you sell your shares within five years, unless you sell them to your spouse or you die.
- Tax relief is provided in the form of a tax credit to set against your overall income tax liability in the tax year. The amount of the tax credit cannot, therefore, exceed your total income tax liability for that tax year.
- Dividends from investments in VCTs do not attract income tax provided the original investment was made within the permitted maximum of £200,000 per year.
- You won’t have to pay any Capital Gains Tax on gains from investments in Venture Capital Trusts and there is no minimum holding period for this rule to apply. But if your VCT investments make a loss, you can’t use this to reduce your Capital Gains Tax bill from other investments.
If things go wrong
Although investment trusts don’t deal directly with the public, many of the investment management firms they employ are regulated by the Financial Conduct Authority.
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